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Accounting Problem from Ryde, New South Wales, Australia

This is the query which came from Ryde, New South Wales, Australia. In this query, student has asked, "In accounting, if company is running a loss, why give dividend?"

Solution

Dear Australian student,

In accounting books, you can not find this because if accounting statement shows loss, it will be against accounting principle to provide dividend. But sometime, if there is big amount of retaining profit (old profit which has not been distributed), then board of director can decide to give dividend out of retained reserve because when company suffers loss, at that time, shareholders of company feel very upset and start to sell the shares of company at very low prices, so, it is very necessary to bring confidence among them. This can only be by providing dividend even if company is running a loss. Ok.

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